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The U.S. corporate earnings season is well under way and, while investors will see them often, the phrases "beat expectations" and "missed expectations" should be avoided as the distraction they are. Year-over-year profit growth is what counts and so far the results are mediocre.

Corporate management has been attempting to support their stock values by lowballing profit forecasts – this influences analyst earnings expectations – to easily achievable levels for a long time. For this reason, earnings beats are far from uncommon and largely irrelevant. They can also obscure the longer term trend in profit growth that is most important for portfolio returns.

The U.S. oil and gas sector is a good example of how measuring earnings against expectations can play with investors' perspectives. With five of 37 S&P 500 oil and gas companies having reported, things at first look pretty good. Revenues have underperformed forecasts by a mere 1.7 per cent and profits have come in 11 per cent ahead of expectations.

But it's clear from the year-over-year comparison that U.S. oil and gas stocks are in far worse shape. Revenues are down 24 per cent versus last year and profits, with a decline of 73 per cent, have been almost completely erased.

In total, 129 S&P 500 companies have reported and year-over-year earnings is tracking a 1-per-cent decline. Basic materials stocks are a bit of a surprise as the most profitable sector to date (barely nudging out telecom), but digging deeper it all makes sense. The 24-per-cent profit growth was almost entirely down to two companies. Alcoa Inc. posted 60.7-per-cent earnings growth from extremely depressed levels and gold miner Newmont Mining Corp. reported a 52.7 per cent year-over-year improvement thanks to higher bullion prices.

Industrials are the third-fastest growing S&P 500 sector, up 17 per cent, but again, the improvement is focused, this time the result of General Electric's 82.1-per-cent profit growth.

The health-care sector, up 7 per cent, is again among the growth leaders, quietly benefiting from demographic factors and consistently generating wealth for investors. The sources of growth within the sector are evolving however, as the formerly high-flying biotech stocks take a breather. UnitedHealth Group Inc., which provides corporate solutions for health-care coverage, has reported the best results in the sector so far with a 19.5-per-cent growth in earnings.

The energy sector is suffering the worst decline in profits in the S&P 500 and this is to be expected in light of the lower commodity price. The 11 per cent year-over-year drop in consumer services earnings is more puzzling because of steady improvement in U.S. wage growth.

There are many traders and investors with the time and focus to use earnings surprise data in an attempt to find inflection points in volatile sectors. For most investors, however, steady year-over-year growth is the path to long-term investment success.

Follow Scott Barlow on Twitter @SBarlow_ROB.

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